Interest calculation method
31. We asked the card issuer chief executives whether
it was a reasonable assumption for a consumer that, with a card
with a higher APR, he or she would end up paying more than with
a card with a lower APR. Sir Fred Goodwin agreed that "it
is a reasonable assumption but there is an element of the calculation
that it does not cover".[52]
He thought that "many consumers would assume that if the
APRs are the same everything else must be the same, that is not
the case".[53] As
we discovered during our earlier inquiry, in addition to the interest
rate, a key determinant of the overall cost of credit to the consumer
is the method used to calculate the interest. This covers factors
such as:
- when lenders begin to charge
interest on purchases made (the date of the transaction, or the
date that the purchase reaches the account);
- when they stop charging interest once a payment
has been received (interest may be charged up to the statement
date of the bill that is paid in full, or up to the date the bill
is paid in full with the additional interest appearing on the
next statement);
- length of interest free periods (the maximum
interest free period may vary between 45-59 days; there may be
no interest free period);
- when new purchases attract interest (interest
may not be charged on purchases in the current month if the bill
is paid in full; interest may be charged on purchases unless the
current bill is paid in full and the previous bill has been paid
in full).
32. Which? provided details during the earlier inquiry
of a number of different charging methods currently in use in
the UK credit card market. They estimated the cost in interest
of a series of transactions over two months, finding that "customers
of 2 cards with the same APR could be charged up to 76% more by
one card than another for the same borrowing, depending on the
interest calculation method used".[54]
We concluded in our previous report that the "different methods
used to calculate the total interest charged are technical and
opaque. Many consumers are unaware such differences exist and
lack the means to calculate what impact they have on using their
credit card. There is a clear need for greater transparency and
if the differences and their effects cannot be explained to the
consumer then some degree of standardisation will be required".[55]
33. Since our earlier report, further evidence has
emerged. Egg issued a welcome report which included consumer research
revealing a significant lack of awareness of the different calculation
methods. Around 81% of consumers were under the impression that
if two different cards with identical APRs were used in exactly
the same manner they would always be charged the same amount of
interest, and 77% felt it was unfair that two different providers
with identical interest rates could vary in the amount of interest
charged. The Chief Operating Officer of Egg commented at the time
of their report: "Different methods of calculating interest
allow providers to subsidise and suppress the upfront APR that
they are advertising, creating an illusion that they are offering
a better deal than is often the case."[56]
34. We asked witnesses if it was fair that the consumer
did not know that two different cards with the same APR used in
the same way could charge different amounts. Mr Geoghegan agreed
it would not be fair (but thought that in fact the consumer would
know).[57] Sir Fred Goodwin
told us that "I do not think it is helpful".[58]
Mr Flynn told us that he did "not think so".[59]
Mr Varley believed that the industry "can improve"[60]
and Mr Hoffman wrote to us following the session to say that Barclaycard
"accept that many consumers do not yet fully understand the
differences in interest charging methods between credit card issuers."[61]
Dr Hunt also observed "It comes as a surprise to the vast
majority of consumers that if they make the same purchase on the
same date with two different cards with the same APR, and then
later pay back the full amount on the same date, those two cards
might charge different amounts of interest. Indeed, it seems completely
contrary to fair play."[62]
35. We note that
even many industry leaders largely conceded that the variety of
interest calculation methods presently in use can be unfair for
the consumer. The consumer may often be unaware that the differences
exist and unable to understand the effects the differences can
have. As one issuer has noted, an "illusion" can be
created that a deal is better than it really is.
36. APACS told us that the industry had agreed that
one of the changes to be made to the summary box was that "it
will feature information on the period over which interest is
charged, improving transparency and providing a means of comparison.
In conjunction with the estimated interest figure (effectively
the maximum interest that might be incurred by the cardholder,
and a figure which is shown on all statements) the implications
of the interest calculation method will be clearly described and
expressed in pounds and pence terms".[63]
37. The industry therefore emphasises clarity of
information and description presented in the summary box as the
way forward in this, rather than any standardisation of the method
used. However, we give four examples below of the type of information
included in summary boxes, which we believe illustrate some of
the difficulties involved.
